LONDON: High oil prices are beginning to cripple the global economic recovery and will lead to a reduction in oil demand later this year, the West’s energy watchdog said Tuesday. The International Energy Agency (IEA) also said the global oil supply rose to an all-time high in February as output by the Organization of Petroleum Exporting Countries (OPEC) fell only slightly after its members stepped in to compensate for the loss of Libyan oil output.
But it added that as a result OPEC’s spare capacity has fallen to its lowest level since late 2008, thus reducing its ability to cushion a new supply shock.
“Empirically, past oil price shocks have shown a discernible effect on GDP. Supply shocks tend to be felt just a few months thereafter, while demand shocks usually have an impact roughly a year later,” the IEA said in its monthly report.
If oil prices remain above $100 a barrel throughout this year it will have a negative impact on the global recovery, the head of the IEA, which advises 28 industrialized countries on energy policy, told Reuters.
“If prices move higher, it will certainly create more problems,” Nobuo Tanaka said adding that the agency is ready to release its strategic crude oil stockpiles if needed in the aftermath of the Japanese earthquake and tsunami.
The IEA trimmed its forecast for 2011 oil demand growth marginally to 1.44 million bpd from its estimate last month. The IEA said it believes Japan has ample spare oil-fired capacity to meet its power generation needs after nuclear plants were damaged during the powerful earthquake.
The country, the world’s third largest economy and the third largest energy consumer, faces a potential radiation catastrophe after a quake-crippled nuclear power plant exploded and sent low levels of radiation floating toward Tokyo.
Both Brent crude futures and U.S. light crude futures fell by more than $3 by 1005 GMT as the unfolding nuclear crisis in Japan triggered risk aversion across markets.
World oil supplies rose to an all-time high of 89 million barrels per day in February even as OPEC crude production fell due to the violent fighting in Libya, the IEA said.
“Even though limited volumes of regional production are affected so far, market perception [even if misguided] that Saudi Arabian facilities, the bulwark of OPEC spare capacity, could be targeted, has brought the geopolitical risk premium back with a bang,” the report said.
Spare production capacity from the Organization of Petroleum Exporting Countries (OPEC) has fallen to the lowest since late 2008, at around 4 million barrels per day (bpd).
The IEA said the ongoing conflict in Libya could have a bigger impact on refiners once the maintenance turnaround period comes to an end in April.
“Market insouciance may change abruptly as April approaches, when global crude demand is expected to increase by around 1 million bpd as Atlantic Basin refinery maintenance ends,” it said in the report.
The strong geopolitical risk premium on crude futures has attracted speculators, according to the agency, with soaring open interest in the contracts helping push prices up.
Speculators’ net-long positions in U.S. crude oil futures rose by 2 percent to hit a new record high in the week to March 8, the Commodity Futures Trading Commission said.